Supreme Court Agrees To Give Urgent Listing For Plea Challenging HC Order Against RBI's Master Circular On Fraudulent Accounts

The Supreme Court on Friday indicated that it will allow urgent listing of SBI and RBI's special leave petitions filed against Telangana High Court's order which held that the principles of natural justice have to be read into the Master Circular issued by the Reserve Bank of India on the classification of bank accounts as fraud accounts.

A request for urgent listing of the case was made by Solicitor General Tushar Mehta appearing for the State Bank of India on Friday before a a Bench comprising CJI NV Ramana, Justice Surya Kant and Justice Hima Kohli.

SG Mehta sought an urgent hearing on grounds that while one High Court has set aside the All india circular of RBI which is pending before the top court in the special leave petition, other High Courts are taking up matters, and issuing orders.

"What circular" The Bench asked.

"There was a circular where we provided what accounts can be declared fraud accounts so other banks can't deal with that entity. That is set aside by the High Court, so whenever notice is issued by the any bank obviously consumers will approach the concerned High Courts." SG said.

"Get the Bundle" CJI said.

The Bench had issued notice in the special leave petitions on 15th April 2021.

A division bench of the High Court comprising Chief Justice Raghvendra Singh Chouhan and B Vijaysen Reddy had held that the account holder must be heard before declaring her as a "fraudulent borrower" or as a "holder of fraudulent account" as per the RBI circular.

"..principles of audi alteram partem, howsoever short, have to be applied before declaring a party as 'a fraudulent borrower', or as 'a holder of fraudulent account'", the bench observed in the judgment passed in the case Rajesh Agarwal vs RBI and others.

"The principles of natural justice, especially the principles of audi alteram partem would have to be read into Clauses 8.9.4 and 8.9.5 of the Master Circular," the High Court had said.

The Master Circular is titled as "Reserve Bank of India(Frauds Classification and Reporting by Commercial Banks and Select Fls) Directions 2016'; the Master Circular was subsequently updated on 30.06.2017.

The Court noted that the circular was issued by the RBI invoking powers under Section 35A of the Banking Regulation Act and therefore had statutory force.

The petitioner before the High Court Rajesh Agarwal, Managing Director of a company named BS Limited, had challenged the decision to classify the account of his company as "fraud" in 2019 by the State Bank of India's Fraud Identification Committee (FIC) and the Joint Lender's Forum (JLF).

The Court had observed that even an administrative functionary / body, like the JLF, would have to balance the twin aspects of 'hurry' and 'hearing'. Instead of having an elaborate hearing proceeding, the proceeding can be short but substantive, prompt but effective.

"Undoubtedly, the JLF needs to form an opinion whether the borrower is playing fraud on the bank or not? Obviously, evidence needs to be placed before the JLF for it to formulate its opinion. Therefore, the evidence to be read against a party needs to be furnished to the party. The party has to be given an opportunity to explain, or to challenge the evidence. Thus, the argument of urgency cannot be accepted for jettisoning the applicability of principles of natural justice", the bench had observed.